Housing Crisis, System Failure

This capitalist crisis resembles a certain kind of serious disease. Different symptoms keep flaring up at different locations. It began with sub-prime mortgages in residential housing. Then, sequential flare-ups hit the private banking system, forced millions out of their jobs and homes, drastically cut world trade, and undermined the public services and national debts of several European countries. Meanwhile, another symptom festered in the credit freeze crippling so much private borrowing. Now, yet another symptom matures as government subsidies and supports to our crisis-ridden private housing industry add rising billions to the deficit.

The unspoken ideological taboo in most public discussion of the economic crisis prohibits seeing or treating the problem as systemic, as a problem of capitalism as a system. Instead, our political, journalistic, and academic leaders mostly see only symptoms and “develop policies” only for those symptoms. Alarms about one symptom — and contested efforts to address it — soon shift to another symptom and “policy responses” for it. Often such policies for one symptom actually worsen another symptom. For example, when stock markets collapsed early in 2000 (symptom), the Federal Reserve drastically cut interest rates (policy response); that move facilitated the excess lending that collapsed the entire economy in 2007.

Today’s alarms focus on housing and huge government subsidies there. To see the systemic problems of the US housing industry, consider its basic economics. The “American dream” of owning one’s home was never affordable to the vast majority of US families because the wages or salaries paid by their employers were never enough. To realize the dream therefore required borrowing. However, because working families had insufficient wages and salaries and no accumulated wealth — their situation inside US capitalism — private banks rarely lent to them. The vast majority of them, not merely the poorest among them, were too risky as borrowers.

A “solution” was found withinUS capitalism. The government would subsidize and guarantee private banks’ loans to millions of homebuyers. This solution boosted profits in private banks’ mortgage loan business. It indirectly subsidized all the industries producing for private homes. Yet it did not raise wages and salaries (something capitalists opposed). Many US workers became homeowners with large, long-term mortgages, making them more dependent on keeping jobs, not offending employers, etc. That experience also prepared workers to accept credit card, student loan, and other consumer debts. Expanding debt became the way most Americans bridged the gap between their incomes and the “good life” relentlessly advertised by capitalists needing buyers.

Government subsidies for housing took off in the last great collapse of US capitalism. The Federal Housing Administration (FHA) was created in 1934 and the Federal National Mortgage Association (FNMA or “Fannie Mae”) in 1938 (the latter was split to form GNMA or “Ginnie Mae” in 1968). The Federal Home Loan Mortgage Corporation (“Freddie Mac”) came in 1970. The goal in the 1930s was recovery of the depressed housing industry. Housing — and the larger US economy dependent on it — have both been increasingly dependent on government guarantees and subsidies ever since.

The 2007 crisis plunged the housing market into serious decline. Poor, middle, and richer homeowners defaulted on their mortgage debts. Banks turned for relief to the government guarantees and subsidies. Providing them has cost the US government outlays now estimated at $150 billion with possibly hundreds of billions more in this crisis. Defaults and falling home prices made banks refuse to provide mortgage loans to almost anyone without government guarantees and subsidies (thus, in 2010, the US government has guaranteed or bought 98 per cent of new private mortgage loans). Without government support, there would be virtually no market in US housing. Even the richest get subsidized: “The Federal Housing Administration agreed in March to insure mortgages for apartments at the 98-unit [New York City] Gramercy Park development, known as Tempo. That enables buyers to make a down payment of as little as 3.5 percent in a building where apartments are listed at $820,000 to $3 million.”

Despite routinely endorsing government housing supports for years, Republicans have suddenly found it politically expedient to attack Democrats for those supports’ impact on the US deficit (ignoring that Bush nationalized Fannie and Ginny Mae and their debts in 2008). Democrats know they cannot cut government supports without producing a deeper housing and general recession which the Republicans would then blame on them. Thus, Treasury Secretary Geithner promises little change in the basic housing subsidy and guarantee system: doing away with it, he says, risks even worse future recessions. For Geithner, no systemic issue exists; for him it’s just a question of how much government support the housing industry needs.

The US housing industry’s basic problem is the system in which it is embedded. The larger capitalist economy shapes the gap between the costs of privately produced homes and American workers’ earnings. Over the last 75 years, US capitalism has bridged that gap by means of private credit guaranteed and/or subsidized by the government. This system provides incentives as well as opportunities for excessive home prices, diminished wages and salaries, and excessive quantities, risks, and costs of housing credit. The last 30 years have seen all three phenomena converge into a systemic crisis.

A systemic solution would include rethinking housing fundamentally. Consider, for example, a national program of building low-cost public housing (in various styles and configurations) owned and operated by local communities. Besides the job-creating virtues of such a program, it could yield high-quality, low-cost alternatives to and long overdue competition for private housing and its prices. Working people could then choose between them. A systemic solution could also raise wages and salaries relative to profits and thereby rebuild the finances of those who buy homes. These two steps would together reduce or remove the dependence on credit that has repeatedly and dangerously spun out of control among lenders and borrowers.

Republicans and Democrats will likely not mention, let alone debate, the systemic causes or solutions to the housing crisis and the mounting losses at the FHA, Fannie, Ginnie, and Freddie. They obey and enforce the ideological taboos of our time; they do not challenge them. Their minor “fixes” for the housing crisis, likely promoted as great reforms, may well worsen the crisis by provoking another symptom somewhere else. To address this society’s systemic problems with systemic solutions will require new political formations without ideological taboos about questioning or changing the system.

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